How to come up with your Offer Price on a Real Estate Deal: Do’s and Don’ts

How do you come up with your offer price? Do you offer 10% less than the offer price? Do you get into a bidding war, pay full asking price, wing it or do you have a strategy to come up with your offer price? I am amazed at the responses to these questions and would love to hear your strategy to come up with your offer price. Here are some tips.

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Don’ts

No emotions, it is about the numbers. The property either meets your criteria or it does not

Do’s

Define your exit strategies – You should have multiple exit strategies such as flip for retail, flip to an investor, rent and hold, lease option, offer seller financing then sell the note, sell the entity holding title, etc.

Define your criteria – LTV and Cash Flow criteria. 70% LTV max and the deal must cash flow. I take 70% of rent and subtract PITI. 70% is because I take off 10% each for property management, vacancy and maintenance.

Find current and After repair value – Do a CMA (Comparative Market Analysis), appraisal and/or BPO (Broker Price Opinion), on the property for current value and ARV.

Conservative repair estimate – Most deals need some repairs and savvy investors can add tremendous value with these repairs. Be conservative in your estimates though, as there are almost always surprises when doing rehab.

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4 Comments

Good article Ryan. Clients really need to be careful not to get emotionally involved. I’ve found and use a free software provided online by RealEstateCritic.com which allows you to itemize and even save scenarios. Makes things much easier.

Thanks Liz. I agree, this is business and only about the numbers. To many decisions are emotional and not good informed business decisions.

I found software very helpful. Eventually I evaluated so many deals that I customized my own excel spreadsheets that have all kinds of crazy calculations for LTV, cash flow, Cap Rate, cash on cash return, ROI, etc. Now I am to the point where I can run the numbers in my head and spit out an offer range. During due diligence I really disect the numbers.

For me it dependes on the situation. If I’m buying to flip then I go through a pretty complicated series of deductions off the anticipated after repair value. If I’m buying to hold then I usually start my search looking for properties that have around a 10% Cap rate.

You are very right… Never… NEVER fall in love with a property. There is always another deal to be had.

Can anyone help me with the excel formula for calculating the offer price when I specify the Cash on Cash return that is required? Basic inputs would be interest rate, down payment %, vacancy %, rental income, operating expenses and of course term of the loan. I have made a spreadsheet but there is some error and the price usually come about 5% too high. And while any online tool is ok, I would like to understand the exact math behind it. Appreciate any help. Thanks